JPMorgan International Equity C JIECX

J.P. Morgan announced that it is winding down the global sector specialist team within the international-equity group in May 2024. The global sector specialists combed through the vast array of ideas from J.P. Morgan's regional research teams and then worked with the portfolio managers to identify sector winners across countries. Of the eight members, four will remain with the firm in portfolio management roles, while the other four are leaving the firm.

According to the firm, the need for an additional research layer between the regional analysts and the portfolio managers eroded since Mark Ferguson assumed the global head of research role in 2020. Since then, the firm has adopted a global research framework used by all regional teams (instead of it differing across regions), while also investing heavily in its portfolio management technology platform, resulting in improved collaboration between portfolio managers and regional analysts.

Importantly, J.P. Morgan still boasts huge analytical resources based all around the world that contribute ideas to the international-equity strategies. And the solid London-based portfolio management team, which includes Tom Murray and Shane Duffy, remains in place. Therefore, the Above Average People ratings and Morningstar Medalist Ratings remain intact on JPMorgan International Equity, JPMorgan International Focus, and JPM International ADR.

JPMorgan International Equity is a standout non-US equity strategy because of its strong management team and robust investment approach.

This strategy is in the capable hands of Tom Murray. He became a comanager in 2004 and has been lead manager since September 2017. Murray is joined by comanagers Shane Duffy, James Sutton, and Zenah Shuhaiber, all of whom have been with JPMorgan for their entire investment careers. This is the same team that runs the ADR-only sibling offering JPMorgan International ADR, while Murray and Duffy co-lead the more concentrated, best-ideas offering, JPMorgan International Focus.

The managers make full use of JPMorgan's huge analytical resources to build a well-balanced portfolio. Supporting the managers are eight global sector specialists who scour the best ideas from the firm’s regional research teams that cover about 2,500 stocks globally. The global specialists ultimately rank prospective stocks from A to C, with A representing their highest-conviction bets, a framework that helps form position-sizing decisions in the end 70- to 100-stock portfolio. Management wants stock selection to drive returns, so it is cognizant to minimize unintended sector, country, and style-related bets relative to the MSCI EAFE prospectus benchmark. For example, while the managers are willing to pay up for some growth-oriented opportunities, valuation is an important consideration as well; this is why the end portfolios tend to land in the core portion of the Morningstar Style Box. Overall, management has married the firm’s in-house strengths with process traits to maximize the odds of success here, helping drive the Process rating to High from Above Average.

The strategy has posted respectable returns during Murray’s leadership. Since September 2017 through February 2024, the mutual fund’s institutional shares gained 4.9% annualized, beating the MSCI ACWI ex USA category index’s 4.0% return and 66% of its foreign large-blend Morningstar Category peers. Risk-adjusted returns told a similar story.

The offering focuses on non-US firms that score well on balance sheet strength, profitability, and management quality. Idea generation relies on this team’s global sector specialists, who scour the best ideas from JPMorgan’s vast regional equity research teams—which cover approximately 2,500 stocks around the world—by viewing their research with a global lens. The global specialists ultimately rank stocks from A to C, with A representing their highest-conviction bets, a framework that helps form position-sizing decisions. The team is long-term-oriented—it sets five-year expected return targets—so it’s no surprise that annual portfolio turnover trends around 30%. While management is willing to pay up for some growth-oriented opportunities, valuation is an important consideration as well. As a result, the portfolio is well-balanced from a style perspective; this is why it landed in the core portion of the Morningstar Style Box.

The portfolio is composed of 70 to 100 stocks, with individual holdings capped at 5%. Management wants stock selection to drive returns, so sector weightings are generally held close to the MSCI EAFE prospectus benchmark, though country-relative weightings can diverge up to 15 percentage points. Up to 15% of portfolio assets can be invested in emerging markets but in practice hasn’t exceeded midsingle digits.

This strategy shares many traits with its more concentrated sibling, JPMorgan International Focus, but there are some differences. JPMorgan International Equity is benchmarked to the MSCI EAFE Index (which excludes emerging markets), but JPMorgan International Focus is benchmarked to the broader MSCI ACWI ex USA category index, which includes emerging markets. As of December 2023, JPMorgan International Equity’s 1% emerging-markets exposure was below JPMorgan International Focus’ 12% and the category index’s 19%. The MSCI EAFE Index also excludes Canada, so this strategy won’t own Canadian stocks, but they can be owned in JPMorgan International Focus.

JPMorgan International Equity's portfolio exposures reinforce that management is cognizant about balancing quality and valuation. Indeed, quality metrics like returns on invested capital have trended above the prospectus benchmark and the category index. At the same time, price multiples like price/earnings have typically been slightly higher than both core indexes over the years but well below their growth counterparts.

Japan has become a growing area of interest for the team, partially because of improving corporate governance. The team added at least nine Japanese holdings since mid-2022 (through December 2023), including tiremaker Bridgestone and conglomerate Hitachi. Japan was the portfolio’s largest absolute stake as of December 2023, at 22%, in line with the prospectus benchmark but well above the category index’s 14%.

Tom Murray has been this strategy’s lead manager since September 2017, when longtime manager James Fisher retired. Murray has 27 years of investment experience, having spent his entire career with JPMorgan, and he’s been a comanager here since 2004. He’s supported by fellow comanagers Shane Duffy, James Sutton, and Zenah Shuhaiber, all of whom sit in London and have been with the firm for their entire careers. Duffy, who joined the firm in 1999, has been a comanager here since 2013 and currently leads the JPM International Growth strategy. Murray and Duffy have also co-led the concentrated sibling offering—JPMorgan International Focus—since its 2011 inception. Sutton and Shuhaiber are the newest additions here, coming aboard as comanagers in 2020 and 2022, respectively. Sutton joined JPMorgan in 2010 and was previously the team’s metals/mining specialist, while Shuhabier’s firm tenure dates back to 2005, having since managed global and European equity mandates.

The managers are supported by a stable group of eight global sector specialists, averaging 22 years of experience and 12 at JPMorgan. They scour the best ideas from the firm’s huge equity research resources—by viewing their regional research with a global lens—providing ample comfort around coverage breadth.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

Since then, through February 2024, the mutual fund’s institutional shares gained 4.9% annualized, beating the MSCI ACWI ex USA category index’s 4.0% return and 66% of its foreign large-blend Morningstar Category peers. While volatility(as measured by standard deviation of returns) was slightly higher than the index, risk-adjusted returns told a similar story, with its Sharpe ratio of 0.24 beating the index’s 0.20 and 65% of peers.

While the offering is well balanced from a style perspective, it has had a slight growth signature. That helps explain why the strategy’s best years have tended to be when growth leads the way, such as in 2019 and 2020. Conversely, the offering struggled in 2022, when value held up much better than growth. The strategy fell 19.6% for the year, which was worse than the index’s 16.0% loss and 88% of peers. Poor stock selection in industrials was the primary culprit, such as distributor Ferguson and machinery maker SMC. But management stuck to its knitting, and the strategy bounced back nicely in 2023, a year when value again beat growth (outside the United States). The offering gained 17.9% in 2023, outpacing the index’s 15.6% gain and 69% of peers. The industrials sector was a key area of strength—including Swedish machinery firm Volvo AB and 2022 laggard Ferguson—as were materials and consumer discretionary.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Silver.